What is a Stablecoin?
Stablecoin is a term to refer cryptocurrencies that meant to hold stable values.
“The coin gets pegged to another stable asset such as gold or the U.S. dollar”. On the other hand, it is not tied to a central bank or authority.
Types of Stablecoins
There are three types of stablecoins which are:
- Fiat-backed stablecoins
- Cryptocurrency-backed stablecoins
- Non-collateralized stablecoins
- Seignorage-Style/Non-collateralized Stablecoins
These are the cryptocurrencies which are pegged to fiat money, such as Tether (USDT) which is pegged 1:1 to the US Dollar.
However, in this type of stablecoin, you still have to trust the central banks as you have to back up the stablecoin fiat money.
In order to process this type of stablecoins, a third party (generally a company) manages the flow of the fiat money and the tokens. When the company get new fiat money, basically they issue the exact amount of stablecoin on the network.
Furthermore, when you want to sell your stablecoins to get your fiat money back, the company will transfer the money to you and destroy your tokens. By doing that, they are maintaining the 1:1 ratio.
- Basic Mechanism:
The mechanism behind the fiat-collateralized stablecoins are easy to understand.
- Fairy Stable:
As governments backing the fiat money, we may say that fiat currencies are stable (not correct for every national currency).
- Trust Issue:
Opposite with the spirit of cryptocurrency, you have to trust a third party. Moreover, you have no control over your tokens.
As you are dealing with fiat money passively, there may be some rules and regulations depending on the fiat money.
These are the stablecoins that backed up commodities such as gas, gold, oil etc. Moreover, commodities have a stable value on the network.
Commodity-Backed stablecoins is not as popular as fiat backed but if you do not want to invest in fiat money, this type of stablecoins are best for you.
- Real Asset:
You can hold real assets in digital forms.
- More Stable:
Commodities don’t really fluctuate that much when compared with fiat money. As a result, these kind of stablecoins are more stable.
As this type depends on too many authorities, it is a very centralized method.
Same with fiat-collateralized stablecoins, cryptocurrency-backed stablecoins have cryptocurrency locked up as collateral, such as Ethereum, Bitcoin etc.
Generally, these types of stablecoins are backed up by a mix of different cryptocurrencies which reduce the risk of volatility.
- More Decentralization:
When compared with fiat backed and commodity backed stablecoins, it has more decentralization.
All transactions are recorded on the ledger system, so you’ll be able to see everything that’s happening.
- More Volatile:
When compared with fiat backed and commodity backed stablecoins, it is more volatile.
- Hard to Understand:
It is hard to understand the basic principle of cryptocurrency backed stablecoins when compared with other two.
These kind of stablecoins are not backed up with any kind of assests, rather than that an algorithm are used to burn or add cryptocurrency to stabilize the value.
- Fully Decentralized:
As the system runned by an algorithm, the network is fully decentralized. There are no third party involvement.
When compared with other methods, this is by far the most stable aproach.
- Complex Process:
The method is hard to understand.
- Not Popular:
Right now, it is not a popular method. Market still prefers to buy USD backed stablecoins.
Popular Stable Coins
1- Tether (USDT)
Tether is the most popular stablecoin in the cryptocurrency market right now. It is a fiat-backed stablecoin. It has a ratio of 1:1 to the US Dollar.
However, Tether has some advantages, it also has some criticism about the centralization of the token.
According to CoinTelegraph news, Bitfinex Allegedly Covers $850 Million Loss With Tether Funds. Bitfinex does have a closer link to Tether stablecoin; as they both seem to have the same CEO.
2- TrueUSD (TUSD)
TrueUSD is another fiat-backed stablecoin.
“The stablecoin has managed to gain a reputation for transparency through regular audits, fully backed collateral, and fulfilled legal requirements for the USD-peg.”
Moreover, TrueUSD has partnerships with numerous banks.
3- Paxos Standard Token (PAX)
“Paxos describes itself as “the first regulated Trust company with blockchain expertise”, and it is using that expertise to create a modern settlement solution that can eliminate risk and simplify settlements.”
It is a stablecoin that backed with US Dollar. Moreover, it’s issued by the Paxos Trust Company, so the funds are carefully protected, audited and regulated.
4- Gemini (GUSD)
GUSD is a fiat backed stablecoin that issued by Gemini Trust Company. Furthermore, the company claims to be the first regulated coin on the market at present with lots of features.
One of the best features of GUSD is the ability to send and receive USD on the platform.